Financial stability and fiscal instability

So, the ECB is out with its monthly bulletin. As always, it’s filled with nice graphs and data.

I want to make a few very simple points. The first is that since the first LTRO, volatility has fallen and markets have risen (for whatever reason). Presented graphically we have stock markets and implied volatility:

Picture 8 214x300 Financial stability and fiscal instabilityPicture 71 192x300 Financial stability and fiscal instabilitySo far so good. It’s hard to make the right decisions when meetings are interrupted by messages of flash crashes, panics, and updates that your pension fund had allocated all your funds to equities. So equity vol has come down. Are we safe? Let’s have a look at government bond yields spreads to bunds:

Picture 9 Financial stability and fiscal instabilityHm. Not quite there yet, but it’s better than in late-2011.

What about the European people? Is austerity the magic cure for all of our problems? Nah, I didn’t think so:

Picture 4 Financial stability and fiscal instabilityIt is really hard to help the unemployed with no growth, and there is correlation between growth and employment. It doesn’t help looking at the scariest chart (youth unemployment). What do I mean? Well, I mean the ECB’s outlook might look a little rosy:

Picture 81 Financial stability and fiscal instability

Finally, how about those banks? Did the LTRO help? Well, we can say for sure that the higher the funding costs (and thus the stress of the bank, presumably), the higher the amount of LTRO funds they took:

Picture 72 Financial stability and fiscal instabilityThis is really important, as the ECB is — as far as I know — the only organization that have all the numbers. We can thus say, with some statistical certainty (see the regression) that the higher the stress of the bank, and the harder it has to access the funding market, the more money it took in the LTRO. Also, CDSs have fallen. Funding is easy now.